PHOTO: Median house prices in New Zealand’s capital city, Wellington, rose 27.7% in the 12 months to February. Photograph: Bloomberg

In this era of cheap money, what once might have looked like a housing bubble might just be the new normal

It’s hard to disagree with the New Zealand government’s recent assessment that the country’s runaway housing market has moved from mere boom to a bubble that endangers the whole economy. Prices rose a staggering 23% over the past year, putting home ownership way beyond most people not already on the fabled ladder – younger, first-time buyers especially. If it walks like a bubble and talks like a bubble, then it must be a bubble, right?

The only problem is that bubbles might not be what they used to be. House prices are being steadily inflated in many other developed economies such as the US and UK. In Australia, prices rose 2.8% in March, the fastest monthly growth for 33 years. But governments are in no hurry to copy Jacinda Ardern’s canary in the coalmine moment, as the renowned Société Générale economist and market sceptic Albert Edwards has dubbed it, and instruct central banks to make dampening prices part of monetary policy.

Quite the opposite, in fact, with the pandemic crisis seeing interest rates slashed last year to yet more all-time lows. The all-powerful US Federal Reserve sets the tone for other central banks and is telling financial markets that ultra-low interest rates could be with us for years. Along with first-time buyer incentives and building grants, low borrowing costs look like ensuring that property prices will keep rising despite the coronavirus recession.

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So while a bubble might be defined as a market where rising prices are not justified by the fundamentals, the era of cheap money ushered in by the global financial crisis and sustained by Covid, has fundamentally changed those fundamentals. There is an expectation that authorities will do anything necessary to keep the party going.

Damien Klassen, head of investments at Nucleus Wealth in Melbourne, believes that the distortion of the property market has further to go because there is more scope for interest rate cuts in western economies.




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